The choice between a secure and unsecured loan should be quite obvious as secured options offer much better terms. However, for many businesses this choice is unavailable because they do not have the collateral to get those good terms. Therefore, finding less favorable loans and suing them wisely might be the best tactic for you.
A great number of businesses today fail because of cashflow problems and loans can be a great solution in this situation. They can tide you over and literally save your company. However, they can be difficult to get, so you need to understand your options when it comes to the types of loan and finance that are available to you, as well as each of their strengths and weaknesses. This is the only way to make a decision that won’t ruin your business in the not-so-distant future.
Secured Vs. Unsecured Loans: Important Differences to Note
Simply put, a secured loan is the one that has collateral. And an unsecured loan has not such “backup” therefore, it presents a higher level of risk to the lender. It’s this fundamental difference that defines other important features of both types of loans.
Usually, secured options have:
- Lower interest rates due to the lower risk.
- More flexible terms, which can be negotiated to fit your business’ needs.
The most important thing for a secured loan, however, is collateral, which is an asset that the lender will take in case you default on your debt. This collateral must not only have sufficient value for the lender to accept it but you also have to maintain it to certain standards. For example, if you take an auto loan, the collateral is your car, and you’ll have to purchase insurance that meets the lender’s standards in order to get this kind of loan.
The problem with secured loans is that the vast majority of businesses don’t have collateral to offer. And even if they possess some assets they can use, the lenders’ requirements are extremely high. Therefore, obtaining any kind of loan from a bank or other traditional type of lenders is a challenge for everyone, who doesn’t run a multi-million corporation.
The wariness of lenders is easy to understand because without the collateral, they expose themselves to a great level of risk. And the state of the global economy is far from reassuring. With the US-China Trade War picking up and Brexit threatening to undermine it further, lenders are right to be cautious because the instability is sure to break millions of businesses worldwide. If they all default on their loans, the impact would be enormous. And it’s not only the lenders that will go down, the world economy as a whole will be crippled severely.
So, secured loans are hard to get and with good reason. Unsecured loans, on the other hand, have very low eligibility requirements. However, lenders offset the risks on those by:
- Setting higher interest rates.
- Offering very strict repayment terms with penalties.
- Limiting the term of the loan (the majority of them are 12 months max).
It’s true that this kind of financing can help you resolve immediate cash flow problems. However, if you aren’t careful, this loan can literally ruin your business. But the good news is that more reasonable unsecured business loans are out there. They don’t offer the same kind of terms as the secured options, but they aren’t extreme either. Choosing an unsecured loan from a trusted lender that doesn’t set outrageous terms can be a game-changer for any business. The trick is to find that kind of lender.
How to Get Good Business Financing Without a Collateral
If you don’t have a collateral to offer, you have to resort to an unsecured loan. Therefore, you need to start looking for the most reasonable offers. The features to look for in this type of lender include:
- Good reputation.
Be sure to research consumer review platforms that are most relevant in your country. Look for lenders with the highest rating and stake your time to read through all available reviews. If there aren’t many, you should be wary of the lender.
- Interest rates.
Accept the fact that an unsecured loan will have a significantly higher interest rate. There is simply nothing you can do about it. However, you should still study the market to learn what the average rate for this type of loan is. For instance, you can read more about financing and commercial real estate rates here. Without doing this, you might not even know that you are getting a very bad deal.
- Eligibility requirements.
In the majority of cases, eligibility requirements for a short-term unsecured loan are minimal. But some lenders are more flexible and can offer better terms. Those would have more stringent requirements, like a set rate of minimal monthly turnover for the business. You should look into these options first as they usually have the best terms.
- Maximum loan amount.
Unsecured loans usually have strict limits, so you need to find out what kind of money the lender can offer first. This way, you would avoid wasting time on the options that can’t meet your cash flow requirements by default. Bear in mind that you shouldn’t take out several short-term loans to make up for the shortfall. This will definitely be more expensive than using one bigger loan.
When do you have to pay out the loan? Can times or payment sizes be changed? Can you pay off the debt earlier? Be sure to study every detail of the loan’s terms and conditions before signing. You need to understand exactly what you are getting in for.
Finding a good unsecured loan will be a challenge, but it’s possible. However, your challenges don’t stop there. You also need to look into the future when taking on this kind of debt. In order to reduce the risk of defaulting on the loan, you should look into alternative funding options as well. For example, you can set up a crowdfunding campaign that will help pay out this loan and avoid problems in the future.
Never stop searching for options when dealing with unsecured loans. As they are rarely good, you should try not to rely on them too much. However, they can be a great solution in an emergency. Most importantly, they provide you the time necessary to seek out more favorable financing options.